Vietnam central bank raises deposit rate ceiling

The State Bank of Vietnam decided Thursday to raise the deposit rate ceiling, refinance rate and rediscount rate for the first time in two years.

The decision will take effect from Friday.

Accordingly, the deposit rate ceiling for term deposits from one month to less than six months will increase by 1 percentage point to 5% per year.

As for people’s credit funds and microfinance entities, the maximum interest rate for term deposits from one month to less than six months will be 5.5% per year.

For demand deposits and those with terms of less than 1 month, the rate ceiling will rise from 0.2% to 0.5% per year.

The refinance rate and rediscount rate will advance by 1 percentage point to 5% and 3.5% a year, respectively.

Interest rates for overnight loans in interbank electronic payments and loans to cover capital shortfalls in clearing payments by the State Bank for credit institutions will climb from 5% to 6% per year.

The move came after the Federal Reserve (Fed) for the third time in a row had raised the benchmark interest rate by 75 percentage points to tame inflation in the U.S.

The State Bank of Vietnam's new policy signals that capital sources for commercial banks are no longer cheap and the central bank is limiting the liquidity of the dong in the market.

The deposit rate ceiling hike will allow banks in need of capital to pay higher deposit rates to encourage depositors. That also means lending rates might increase in tandem.

Earlier on the same day, Prime Minister Pham Minh Chinh asked the State Bank to consider raising its policy interest rates, while steadying lending rates.

The government leader made the instruction to the central bank at a cabinet meeting in Hanoi, following the Fed’s latest benchmark rate hike.

Chinh, however, called on domestic banks to keep their lending rates stable to support the nation’s post-pandemic economic recovery, even to cut down rates for loans to some corporate borrowers in the recovery process.

The State Bank move shows that it is difficult for the country to keep interest rates low in the context of the Fed continuously increasing interest rates, putting pressure on the USD/VND exchange rate.